Business Case Studies & Business Publications

Western Asset Arbitrage

Loutskina, Elena, ...

Case

Western Asset Arbitrage

Loutskina, Elena; Prabhu, Rahul

F-1577 | Published April 23, 2009 | 18 pages Case

Collection: Darden School of Business

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The case introduces students to the nature of collateralized debt obligations (CDO) and the CDO origination process, with emphasis on the corporate structure of the special purpose vehicles, cash flows to various CDO tranches, and motivation behind CDO origination. Students will learn to quantitatively evaluate the risk-return profile of CDO tranches with emphasis on the equity tranche (also known as "toxic waste"). This is ideal for MBA and advanced undergraduate level courses on financial markets, financial institutions, and investments. In the case, an associate at the Debt Capital Markets desk of Lehman Brothers prepares a CDO issuance for Western Asset. Western Asset had been contacted by a group of commercial banks eager to sell senior secured bank loans and high-yield corporate bonds to lower their capital requirements and free up capital for additional lending.

1. Learn the process of CDO creation. 2. Understand the structure and purpose of the special purpose vehicles (SPV). 3. Evaluate risk-return profile of CDO tranches.